Test 4

Accounting for income taxes can result in the reporting of deferred taxes as...?

A non-current liability

An example of a permanent difference is...?

A. A federal fine on EPA violations B. Proceeds from life insurance on officers C. interest expense on money borrowed to invest in municipal bonds D. insurance expense for a life insurance policy on officers Answer: ALL OF THE ABOVE

All of the following are procedures for the computation of deferred income taxes except to...? A.identify the types and amounts of existing temporary differences. B.measure the total deferred tax liability for taxable temporary differences. C.measure the total deferred tax liability for deductible temporary differences. D.determine taxes payable

Answer: C.measure the total deferred tax liability for deductible temporary differences.

Deferred taxes should be presented on the balance sheet....?

As a non-current amount

Crane Company made the following journal entry in late 2021 for rent on property it leases to Danford Corporation. Cr-Cash 149000 Dr-Unearned rent revenue 149000 The payment represents rent for the years 2022 and 2023, the period covered by the lease. Crane Company is a cash basis taxpayer. Crane has income tax payable of $229000 at the end of 2021, and its tax rate is 25%. What amount of income tax expense should Crane Company report at the end of 2021?

DTA=(unearned rent revenue)*(tax rate)=149,000*.25=37,250 income tax exp=(income tax payable)-(DTA calculated)=229,000-37,250=191,750 Answer: Income tax expense to be reported at end of 2021 is $191,750

At the end of 2020, its first year of operations, Easter Corp prepared the following reconciliation between pretax accounting income and taxable income: Pretax accounting income $300,000 Estimated litigation expense 750,000 Instalment sales (600,000) Taxable income $450,000 The estimated litigation expense of $750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized in the amount of $300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred income tax liability to be recorded is?

Deferred tax liability=(estimated litigation exp-pretax acc income)*(tax rate)=(750,000-300,000)*(.30)=135,000 Answer: $135,000 of deferred tax liability should be recognized

Which of the following differences would result in future taxable amounts?

Expenses or losses that are tax deductible after they are recognized in financial income

T/F: Pretax financial income is the amount used to compute income taxes payable.

FALSE It is the income that is accumulated before income taxes are paid on it.

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates ? I. Accrual for product warranty liability. II. Subscriptions received in advance III. Prepaid insurance expense

I and II only

Wildhorse Company deducts insurance expense of $201,000 for tax purposes in 2021, but the expense is not yet recognized for accounting purposes. In 2022, 2023, and 2024, no insurance expense will be deducted for tax purposes, but $67,000 of insurance expense will be reported for accounting purposes in each of these years. Wildhorse Company has a tax rate of 20% and income taxes payable of $174,000 at the end of 2021. There were no deferred taxes at the beginning of 2021. Assuming that income taxes payable for 2022 is $228,000, the income tax expense for 2022 would be what amount?

Income tax expense=(income tax payable for 2022)-((ins exp to be reported)*(tax rate))=(228,000)-(67,000*.20)=214,600 Answer: Income tax expense for 2022 of $214,600

Dew Corp.'s 2021 income statement showed pretax accounting income of $2,000,000. To compute the federal income tax liability, the following 2021 data are provided: Income from exempt municipal bonds $ 100,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 200,000 Estimated federal income tax payments made 330,000 Enacted corporate income tax rate 20% What amount of current federal income tax liability should be included in Dew's December 31, 2021 balance sheet?

Pretax accounting income=2,000,000-(income from exempt muni bonds)-(depreciation deducted ect.)=2,000,000-100,000-200,000=taxable income of 1,700,000*(tax rate)=1,700,000*(.20)=total income tax payable 340,000-(estimated fed inc tax payments)=340,000-330,000=10,000 Answer= $10,000 amount of current federal income tax liability that should be included on 12/31 balance sheet

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be...?

Reported as an adjustment to income tax expense in the period of the change

Sheridan Corporation purchased a machine on January 2,2020, for $3,300,000. The machine has an estimated 5 -year life with no salvage value The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2020-660,000 2021-1,056,000 2022-633,600 2023-379,500 2024-379,500 2025-191,400 Assuming an income tax rate of 20% for all years, the net deferred tax liability that should be reflected on Sheridan's balance sheet at December 31.2021 be?

Straight Line method DTL for 2021: depreciation=(orig cost - salvage value)/(useful life)=3,300,000/5=660,000 DTL 2020 MCRS: (MACRS amount - depreciation)*(tax rate)=(660,000-660,000)*.20=0 DTL 2021 MCRS: (MACRS amount - depreciation)*(tax rate)=(1,056,000-660,000)*.20=79,200 TOTAL DTL=DTL for 2020 + DTL for 2021=0+79,200=79,200 is the answer

True or False: Taxable temporary amounts cause taxable income to be greater than pretax financial income in the future when reversing?

TRUE

Crescent Company reported the following results for the year ended December 31, 2022, its first year of operations: Income (per books before income taxes) 2,000,000 Taxable income 3,200,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2023. What should Crescent record as a net deferred tax asset or liability for the year ended December 31, 2022, assuming that the enacted tax rates in effect are 20% in 2022 and 25% in 2023?

Temporary difference=(income per books b4 inc tax)-(taxable inc)=3,200,000-2,000,000=$1,200,000 Tax rate 2023(given)=25% DTA=temporary difference*2023 tax rate=1200000*25%=$300,000 Answer=Deferred Tax Asset of $300,000

A major distinction between temporary and permanent differences is...?

Temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be?

Using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.

Crane Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income 2,340,000 Estimated litigation expense 3,340,000 Extra depreciation for taxes (5,352,000) Taxable income 328,000 The estimated litigation expense of $3,340,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1784000 in each of the next 3 years. The income tax rate is 20% for all years. The deferred tax asset to be recognized is?

deferred tax asset=(estimated litigation expense)*(tax rate)=(3,340,000)*(.20)=668,000 Answer is 668,000

Reese Corporation reported $200,000 in revenues in its 2021 financial statements, of which $66,000 will not be included in the tax return until 2022. The enacted tax rate is 30% for 2021 and 25% for 2022. What amount should they report for deferred income tax liability in its balance sheet at December 31, 2021?

deferred tax liability=(revenue not included)*(tax rate 2022)=66,000*(.25)=16,500 Answer:Deferred tax liability is $16,500

Cullumber Co., organized on January 2, 2021, had pretax accounting income of $850,000 and taxable income of $2,570,000 for the year ended December 31, 2021. The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2022 $602,000 2023 $258,000 2024 $258,000 2025 $602,000 The enacted income tax rates are 25% for 2021, 20% for 2022 through 2024, and 15% for 2025. If Cullumber expects taxable income in future years, the deferred tax asset in Cullumber's December 31, 2021 balance sheet should be...?

do this formula for all years then add all final answers for each year to compute the answer: yearX=(expected warranty cost for corresponding year)*(tax rate for corresponding year)=ZZZ

A company's partial income statement after its first year of operations is provided below PARTIAL INCOME STATEMENT FOR FIRST YEAR OF OPERATIONS: Income before income taxes $1,750,000 Income tax expense: Current 483,000 Deferred 42,000 Net Income 1,225,000 The company uses the straight line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $700,000. No other differences existed between book income and taxable income except for the amount of depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year? (a) $560,000. (b) $665,000 (c) $700,000. (d) $840,000

gross taxable timing diffrence=(deferred tax exp per yer)/(tax rate)=42,000/.30=140,000 taxable timing diffrence=140,000-(-depreciating as per books)=140,000+700,000=840,000 D.$840,000 is correct

Crane Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: pretax financial income 2,945,000 estimated litigation expense 3,945,000 extra depreciation for taxes (5,946,000) taxable income 944,000 The estimated litigation expense of $3945000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1982000 in each of the next 3 years. The income tax rate is 20% for all years. Income taxes payable is?

income taxes payable=(taxable income)*(tax rate)=944,000*(.20)=188,800 Answer= $188,800

Wilson Corporation reported the following results for its first two years of operation: 2020 loss (before income taxes) (1,700,000) 2021 income (before income taxes) 2,200,000 There were no permanent or temporary differences during these two years. Assume a corporate tax rate of 25% for 2020, and 30% for 2021. What net income (loss) is reported in 2020?

ncome Tax Expense for 2020=(2020 loss before income taxes)*(2020 tax rate)=−1,700,000×0.25=−425,000 Net Income/Loss for 2020=(Income before Income Taxes for 2020)−(Income Tax Expense for 2020)=-1,700,000-(-425,000)=-1,275,000 Answer: $(1,275,000)

Operating income and tax rates for C.J. Company's first two years of operations were as follows: Income Enacted tax rate 2014 $300,000 35% 2015 ($750,000) 30% The 30% tax rate for 2015 stems from tax legislation that was enacted during 2014. What deferred tax asset or liability will the company report on its December 31, 2014 Balance Sheet?

taxable income 2014=(income tax enacted)*(tax rate for 2014)=300,000*(.35)=105,000 taxable income 2015=(income tax enacted)*(tax rate for 2015)=-750,000*(.30)=-225,000 temporary difference=(taxable income 2014)-(taxable income 2015)=105,000-(-225,000)=330,000 Answer=Amount- 330,000; deferred tax asset or liability- deferred tax asset

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 20% in 2021, its first year of operations. During 2021 the company had the following transactions: Received rent from Jane, Co. for 2022 96,000 Municipal bond income $120,000 Depreciation for tax purposes in excess of book depreciation $60,000 Installment sales profit to be taxed in 2022 $162,000 For 2021, what is the amount of income taxes payable for Rowen, Inc?

taxable income=(pre tax accounting income)+(rent received)-(municipal bond income)-(tax depreciation in excess of book depreciation)-(installment sales profit to be taxed in 2022)=2,700,000+96,000-120,000-60,000-162,000=2,454,000 income taxes payable=(taxable income)*(tax rate)=2,454,000*(.20)=490,800

On January 1, 2021, Gore, Inc. purchased a machine for $2,250,000 which will be depreciated $225,000 per year for financial statement reporting purposes. For income tax reporting, gore deducted $200,000 of depreciation expense on its 2021 tax return. Assume a present and future enacted income tax rate of 20%. What amount should be added to Gore's deferred income tax liability for this temporary difference at December 31, 2021?

temporary diffrence=(financial statement depreciation)-(income tax depreciationo)=225,000-200,000=25,000 deferred income tax liability=(temporary difference)*(tax rate)=25,000*(.20)=5,000 is the answer

Recognition of tax benefits in the operating loss year due to a loss carryforward requires?

the establishment of a deferred tax asset